Tuesday, December 28, 2021
The mid-December wildfire in Kansas resulted in loss of livestock along with damage to farm/ranch buildings and structures. The wind damage was more widespread than just Kansas, and I wrote about the tax issues associated with demolishing farm buildings and structures that are no longer usable as a result of the storm here: https://lawprofessors.typepad.com/agriculturallaw/2021/12/inland-hurricane-2021-version-is-there-any-tax-benefit-to-demolishing-farm-buildings-and-structures.html.
What I didn’t address in that article are the tax issues associated with the receipt of USDA Livestock Indemnity Program (LIP) payments for livestock deaths and the tax issues associated with the receipt of those payments.
USDA LIP payments and the associated tax reporting – it’s the topic of today’s post.
The LIP Program
The LIP program, administered by USDA’s Farm Service Agency (FSA), was created under the 2014 Farm Bill to provide benefits to livestock producers for livestock deaths that exceed normal mortality caused by adverse weather and other events such as attacks by animals that have been reintroduced into the wild, as well as death caused by certain diseases. The 2018 Farm Bill expanded eligibility for LIP payments to contract growers. LIP payments are also available to livestock owners that sell livestock at a reduced price due to an eligible loss condition. Eligibility for LIP payments turns on the livestock owner providing sufficient evidence of an eligible cause of loss that was a direct cause of loss or death.
Note: Livestock deaths due to extreme cold are eligible losses (whether the livestock were vaccinated or not), as are livestock deaths due to disease as a result of particular causes.
Payment amount. The amount of a LIP payment is set at 75 percent of the market value of the livestock (as the USDA determines) on the day before the date of death. For contract growers of poultry or swine, LIP payments are capped at the rate for owners, but are based on 75 percent of the national average input costs for the livestock at issue.
Note: Eligible livestock are those that were used as part of a farming operation as of the day of death. This rule excludes animals such as those that are wild and free-roaming; pets; or animals used for recreational purposes (e.g., hunting, roping or for show).
The market value of the livestock is tied to a “national payment rate” for each eligible livestock category as published by the USDA. LIP payments are adjusted for normal mortality. If LIP payments are issued for injured livestock that are sold at a reduced price, the payments are reduced by the amount the owner received on sale. If the livestock are sold for more than the national payment rate there is no LIP payment.
For contract growers, the LIP national payment rate is based on 75 percent of the average income loss sustained by the contract grower with respect to the livestock that died. Any LIP payment that a contract grower is set to receive will be reduced by the amount of monetary compensation that the grower received from the grower’s contractor for the loss of income sustained from the death of the livestock grown under contract.
Eligibility. To be eligible for a LIP payment (for other than contract growers of poultry or swine), the livestock owner must have owned the livestock on the day the livestock died or were injured by an eligible loss condition. The owner must have suffered a death loss that exceeded normal mortality as a direct result of an eligible loss condition, or sold the livestock at a reduced price as a result of an injury incurred as a direct result of an eligible loss condition. Contract growers of poultry and swine must have had possession and control of the animals and a written agreement with the owner establishing the specific terms, conditions and obligations of the parties regarding the production of the livestock.
Note: Contract growers are not eligible for LIP payments based on injured livestock being sold at a reduced price due to an eligible loss condition.
Eligible livestock and poultry. Eligible livestock include beef bulls and cows, buffalo, beefalo and dairy cows and bulls. Non-adult beef cattle, beefalo and buffalo are also eligible livestock. Eligible poultry include chickens, broilers, pullets, layers, chicks, Cornish hens, roasters, super roasters, ducks, ducklings, geese, goslings, and turkeys. Swine is also eligible and includes nursery pigs, lightweight barrows and gilts, as well as sows and boars. Other eligible animals include alpacas, deer, elk, emus, equine, goats, llamas, ostriches, reindeer, caribou and sheep.
Eligible loss condition. An “eligible loss condition” includes an adverse weather event that was extreme and not expected to occur during the loss period for which it actually occurred. The weather event must be a direct cause of the livestock losses. An eligible disease is one that is made worse by an eligible adverse weather event that directly results in livestock losses. It also includes diseases caused or transmitted by vectors where vaccination or acceptable management practices are not available. An eligible loss condition may also be based on an attack by animals that have been reintroduced into the wild by the Federal Government. The attack must have resulted in either death of livestock in excess or normal mortality rates, or the sale of the livestock at below market value.
Note: The livestock must have died within 60 calendar days from the ending date of the “applicable adverse weather event” and in the calendar year for which benefits are requested.
Payment limitation. The general $125,000 per person payment limitation does not apply to LIP payments. But to be eligible for LIP payments, the applicant must have average adjusted gross income (AGI) over a three-year period that is less than or equal to $900,000. For 2021, the applicable three-year period is 2017-2019.
Note: For a particular producer, the application of the AGI limitation could mean that tax planning strategies to keep average AGI at or under $900,000 need to be implemented. That might include the use of deferral strategies, income averaging and/or amending returns to make or revoke an I.R.C. §179 election.
Direct attribution rules apply to LIP payments. That means that the AGI limitation applies to the person or legal entity that requesting payment as well as to those persons or entities with an interest in the entity or sub-entity.
Applying for payment. An eligible producer (owner or contract grower) must submit a notice of loss and an application for LIP payments with the local FSA office. A notice of loss must be submitted within the earlier of 30 days of when the loss occurred or became apparent. In addition, an application for payment must be filed within 60 calendar days after the end of the calendar year in which the loss occurred. Application for LIP payments is to be made with the local USDA/FSA office that serves the county in which the loss occurred. For contract growers, a copy of the grower contract must also be provided. For all producers, it is important to submit evident of the loss supporting the claim for payment via Form CCC-852. Photographs, veterinarian records, purchase records, loan documentation, tax records, and similar data can be helpful in documenting losses. Of course, the weather event triggering the livestock losses must also be documented. If the livestock owner/grower is not able to provide acceptable records to prove death or loss of value due to injury, the owner/grower is to use a third-party certification via Form CCC-854. The third party must be an independent source who is not affiliated with the farming/ranching operation, and cannot be a hired hand or family member.
Given that the Kansas wildfire occurred mid-December, it is likely that any LIP payments will not be received until 2022. For LIP payments that are paid out, the FSA will issue a 1099G for the full amount of the payment. That could create an issue for some livestock producers.
Death of breeding livestock. While the 1099G simply reports the gross amount of any LIP payment to a producer for the year, there may be situations where a portion of the payment is compensation for the death loss of breeding livestock. If the producer would have sold the breeding livestock, the sale might have triggered an I.R.C. §1231 gain that would have been reported on Form 4797. If LIP payments were received for cattle or horses that the owner had held for 24 months or more from the acquisition date and the animals were held for draft, breeding, dairy or sporting purposes (assuming the LIP payment applies to animals held for a sporting purpose), then the LIP payment would constitute I.R.C. §1231 gain. The holding period is 12 months or more for other livestock. I.R.C. §1231 gain is reported on Form 4797 rather than Schedule F. By being reported on Form 4797, self-employment tax will not apply. However, the IRS will look for Form 1099G amounts paid for livestock losses to show up on Schedule F – most likely on line 4a (Agricultural Program Payments). This raises a question as to whether it is possible to allocate the portion of the LIP payments allocable to breeding livestock from Schedule F to Form 4797.
Income inclusion and deferral. The general rule is that any indemnity payments (or feed assistance) are reported in income in the tax year that they are received. That would mean, for example, that payments received in 2021 for livestock losses occurring in 2021 will get reported on the 2021 return. Payments for livestock losses occurring in 2021 that were received in 2022 will be reported in 2022.
The receipt and inclusion in income of LIP payments could also put a livestock producer in a higher income tax bracket for 2021/2022. In that instance, there might be other tax rules that can be used to defer the income associated with the livestock losses. Under I.R.C. §451(f), the proceeds of livestock that are sold on account of weather-related conditions can be deferred for one year. Under another provision, I.R.C. §1033(e), the income from livestock (not poultry) sales where the livestock are held for draft, dairy or breeding purposes that are involuntarily converted due to weather can be deferred if the livestock are replaced with like-kind livestock within four years. The provision applies to the excess amount of livestock sold over sales that would occur in the course of normal business practices.
While I.R.C. §451(f) requires that a sale or exchange of the livestock must have occurred, that is not the case with the receipt of indemnity payments for livestock losses. So, that rule doesn’t provide any deferral possibility. The involuntary conversion rule of I.R.C. §1033(e) is structured differently. It doesn’t require a sale or exchange of the livestock, but allows a deferral opportunity until animals are acquired to replace the (excess) ones lost in the weather-related event Thus, only the general involuntary conversion rule of I.R.C. §1033(a) applies rather than the special one for livestock when a producer receives indemnity (or insurance) payments due to livestock deaths. Thus, for LIP payments received in 2022, they will have to be reported on the 2022 return unless the recipient acquires replacement livestock within the next two years – by the end of 2024. Any associated gain would then be deferred until the replacement livestock are sold. At that time, any gain associated gain would be reported and the gain in the replacement animals attributable to breeding stock would be reported on Form 4797.
Livestock losses due to weather-related events can be difficult to sustain. LIP payments can help ease the burden. Having the farming or ranching operation structured properly to receive the maximum benefits possible is helpful, as is understanding the tax rules and opportunities for reporting the payments.